Business

Discussion Question(s) #3

Please reply to this thread by or before Sunday, day 6 with your answers!

•         How would you explain the use of time value of money (TVM) in business? What considerations are made when calculating TVM? How can you use TVM to create your own, or someone else’s, retirement plan?

How would you explain the use of time value of money (TVM) in business?

Time Value of Money (TVM) is a means of determining the value of money across spans of time at given interest rates. It is a tool to help individuals or businesses equate dollars in hand with future money. This equation assists in the evaluation of investment opportunities or other problems or comparisons between the value of money at one point in time and the value of money at some other point in time.

What considerations are made when calculating TVM?

TVM is calculated based on a few factors. Generally, one must consider a given present or future value of money, an interest rate expressed as a percentage or ratio over a specified unit of time, and a length of time. For any given values of two of these variables, the third may be computed, e.g. if a given value of $1,000 is known to be worth $1,080 after an unknown time at 8% annual interest, one may calculate the unknown length of time to be one year ($1,080 - $1,000) / $1,000 / 8% / year = 1 year. The basic formula for these and related calculations is PV (present value) = FV (final value) / (1 + r (interest rate)).

How can you use TVM to create your own, or someone else’s, retirement plan?

TVM can be used to create a retirement plan in several ways. One may estimate the size of one’s “nest egg” – or the amount of money in his or her retirement fund – based on TVM formulas and a given contribution level. It would also be possible to better understand the nest egg’s actual value by using TVM to put the amount in today’s dollars (by adjusting downwards for inflation). One may also estimate the level of...